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On the Esscher transforms and other equivalent martingale measures for Barndorff-Nielsen and Shephard stochastic volatility models with jumps

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  • Hubalek, Friedrich
  • Sgarra, Carlo

Abstract

We compute and then discuss the Esscher martingale transform for exponential processes, the Esscher martingale transform for linear processes, the minimal martingale measure, the class of structure preserving martingale measures, and the minimum entropy martingale measure for stochastic volatility models of the Ornstein-Uhlenbeck type as introduced by Barndorff-Nielsen and Shephard. We show that in the model with leverage, with jumps both in the volatility and in the returns, all those measures are different, whereas in the model without leverage, with jumps in the volatility only and a continuous return process, several measures coincide, some simplifications can be made and the results are more explicit. We illustrate our results with parametric examples used in the literature.

Suggested Citation

  • Hubalek, Friedrich & Sgarra, Carlo, 2009. "On the Esscher transforms and other equivalent martingale measures for Barndorff-Nielsen and Shephard stochastic volatility models with jumps," Stochastic Processes and their Applications, Elsevier, vol. 119(7), pages 2137-2157, July.
    • Handle: RePEc:eee:spapps:v:119:y:2009:i:7:p:2137-2157
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    Cited by:

    1. Almut Veraart & Luitgard Veraart, 2012. "Stochastic volatility and stochastic leverage," Annals of Finance, Springer, vol. 8(2), pages 205-233, May.
    2. Szczepocki Piotr, 2020. "Application of iterated filtering to stochastic volatility models based on non-Gaussian Ornstein-Uhlenbeck process," Statistics in Transition New Series, Statistics Poland, vol. 21(2), pages 173-187, June.
    3. Piotr Szczepocki, 2020. "Application of iterated filtering to stochastic volatility models based on non-Gaussian Ornstein-Uhlenbeck process," Statistics in Transition New Series, Polish Statistical Association, vol. 21(2), pages 173-187, June.
    4. Friedrich Hubalek & Martin Keller-Ressel & Carlo Sgarra, 2014. "Geometric Asian Option Pricing in General Affine Stochastic Volatility Models with Jumps," Papers 1407.2514, arXiv.org.
    5. Martino Bardi & Annalisa Cesaroni & Andrea Scotti, 2014. "Convergence in Multiscale Financial Models with Non-Gaussian Stochastic Volatility," Papers 1405.6514, arXiv.org.
    6. José Fajardo, 2014. "Symmetry and Bates’ rule in Ornstein–Uhlenbeck stochastic volatility models," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 37(2), pages 319-327, October.
    7. Fred Espen Benth & Carlo Sgarra, 2024. "A Barndorff-Nielsen and Shephard model with leverage in Hilbert space for commodity forward markets," Finance and Stochastics, Springer, vol. 28(4), pages 1035-1076, October.
    8. Thorsten Rheinländer & Jenny Sexton, 2011. "Hedging Derivatives," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 8062, August.

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